Lid lifts on local currency corporate debt with index launch
Local currency debt markets took a step forward this week with the launch of a dedicated index for the asset class
Bank of America Merrill Lynch unveiled a suite of four indices tracking non-sovereign, euro-clearable bonds denominated in EM currencies on Wednesday.
The Diversified Local Emerging Market Non-Sovereign Index, LOCL, is the most appropriate of the four to be a performance benchmark, says Phil Galdi, research analyst at BAML, because it has a larger minimum size requirement for issues to be included, and has caps on currency and issuer weightings. It also excludes Sukuk.
Those caps mean close to a third of the index is made up of Latin American credits — compared to just a 9% composition in the market-weighted index.
Brazilian real bonds had a 13.04% weight in the LOCL index at the end of September, Colombian peso notes 8%, and Mexican peso debt, 7.95%. Paper issued by Empresas Públicas Medellín, Banco Safra and Red de Carreteras de Occidente are in the highest-weighted grouping in the index — at 2% each — alongside LatAm’s best-known borrowers such as América Móvil and Pemex.
Around $264 billion worth of non-sovereign EM local currency debt outstanding is Euroclearable — just a small slice of the $4.2 trillion equivalent that BAML calculates is outstanding in total. As such, the launch of this index is a small step to further develop the local currency markets for international accounts.
The lack of an index — which provides pricing transparency and a reference point — had held back the development of a market in locally-denominated corporate bonds, investors told LatinFinance.
“Until now, we have grappled with not having a reference index to measure performance in this market,” says Matt Claeson, portfolio manager at Compass Group. The LatAm-focused firm and its affiliates manage roughly $6 billion of assets, including in a dedicated LatAm corporate local currency fund. “This is a significant step forward – the market has needed a reference point to help it grow.”
Local currency debt has widened sharply since the US Federal Reserve began discussing an end to its quantitative easing program in May. The LOCL index yield has moved from around 6% to close to 8%, according to BAML data. LF